ATLAS AIR WORLDWIDE HOLDINGS, INC. The following discussion and analysis should be read in conjunction with the Financial Statements included in Item 8 of this report.
Business Overview
We are a leading global provider of outsourced aircraft and aviation operating services. We operate the world's largest fleet of 747 freighters and provide customers a broad array of 747, 777, 767 and 737 aircraft for domestic, regional and international cargo and passenger operations. We provide unique value to our customers by giving them access to highly reliable modern production freighters that deliver the lowest unit cost in the marketplace combined with outsourced aircraft operating services that we believe lead the industry in terms of quality and global scale. Our customers are primarily under long-term contracts and include express delivery providers, e-commerce retailers, theU.S. military, charter brokers, freight forwarders, direct shippers, airlines, manufacturers, sports teams and fans, and private charter customers. We provide global services with operations inAfrica ,Asia ,Australia ,Europe , theMiddle East ,North America andSouth America .
We believe that the following competitive strengths will allow us to capitalize on opportunities that exist in the global airfreight industry:
Market leader with leading-edge technology and differentiated, value-creating solutions
The 747-8F and 777-200LRF aircraft are two of the most efficient long-haul wide-body commercial freighters available and we are currently the only operator offering both of these aircraft under ACMI and CMI agreements. Our operating model deploys our aircraft to drive maximum utilization and value from our fleet. The scale of our fleet enables us to have aircraft available globally to respond to our customers' needs, both on a planned and ad hoc basis. We believe this provides us with a commercial advantage over our competitors that operate smaller and less flexible fleets. OurDry Leasing business is primarily focused on a portfolio of 777-200LRF aircraft, and our fleet of 767-300 freighter aircraft for regional and domestic applications. These aircraft are Dry Leased to customers on a long-term basis, which further diversifies our business mix and enhances our predictable, long-term revenue and earnings streams.
Stable base of contractual revenue and reduced operational risk
Our focus on providing long-term contracted aircraft and operating solutions to customers stabilizes our revenues and reduces our operational risk. ACMI and CMI contracts with customers generally range from two to seven years. Long-term Charter programs provide customers with dedicated Charter capacity generally ranging from one to three years. We also provide certain of these services on a short-term basis.Dry Leasing contracts with customers generally range from five to nine years. Under these types of contracts, our customers assume fuel, demand and price risk resulting in reduced operational risk for AAWW, while typically providing us with a guaranteed minimum level of revenue and target level of profitability.
Focus on asset optimization
By managing the largest fleet of outsourced freighter aircraft, we achieve significant economies of scale in areas such as aircraft maintenance, crew efficiency, crew training, inventory management and purchasing.
Our mix of aircraft is closely aligned with our customer needs. By providing the broadest array of 747, 777, 767 and 737 aircraft for domestic, regional and international applications, we believe that we are well-suited to meet the current and anticipated requirements of our customers.
We continually evaluate our fleet to ensure that we offer the most efficient and
effective mix of aircraft to meet our customers' needs. Our service model is
unique in that we offer a portfolio of operating solutions that complement our
freighter aircraft businesses. We believe this allows us to improve the returns
we generate from our asset base by allowing us to flexibly redeploy aircraft to
meet changing market conditions, ensuring the maximum utilization of our fleet.
Our Charter services complement our ACMI services by allowing us to increase
aircraft utilization during open time and to react to changes in demand and
Yield in these businesses. We have employees situated around the globe who
closely monitor demand for commercial charter services in each region, enabling
us to redeploy available aircraft quickly. We also endeavor to manage our
portfolio to stagger contract terms, which mitigates our remarketing risks and
aircraft down time.
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--------------------------------------------------------------------------------Long-term strategic customer relationships and unique innovative service offerings
We combine the global scope and scale of our efficient aircraft fleet with high-quality, cost-effective operations and premium customer service to provide unique, fully integrated and reliable solutions for our customers. We believe this approach results in customers that are motivated to seek long-term relationships with us. This has historically allowed us to command higher prices than our competitors in several key areas. These long-term relationships help us to build resilience into our business model. Our customers have access to our innovative solutions, such as inter-operable crews, flight scheduling, fuel-efficiency planning, and maintenance spare coverage, which, we believe, set us apart from other participants in the outsourced aircraft and aviation operating services market. Furthermore, we have access to valuable operating rights to restricted markets such asBrazil ,Japan andChina . We believe our freighter services allow our customers to effectively expand their capacity and operate dedicated freighter aircraft without simultaneously taking on exposure to fluctuations in the value of owned aircraft and, in the case of our ACMI and long-term Charter contracts, long-term expenses relating to crews and maintenance. Dedicated freighter aircraft enable schedules to be driven by cargo rather than passenger demand (for those customers that typically handle portions of their cargo operations via belly capacity on passenger aircraft), which we believe allows our customers to drive higher contribution from cargo operations.
We are focused on providing safe, secure and reliable services. The Airlines
have successfully completed the
We provide outsourced aircraft and aviation services to some of the world's premier express delivery providers, e-commerce retailers, airlines and freight forwarders. We will take advantage of opportunities to maintain and expand our relationships with our existing customers, while seeking new customers and new geographic markets. Experienced management team Our management team has extensive operating and leadership experience in the airfreight, airline, aircraft leasing and logistics industries at companies such as United Airlines,US Airways , Lufthansa Cargo, GE Capital Aviation Services,GE , Air Canada,Canadian Airlines ,America West Airlines ,American Airlines , JetBlue Airways, ICF International, ASTAR Air Cargo,FPG Amentum , KLM Cargo,SMBC Aviation Capital , Spirit Airlines, Spirit AeroSystems,Singapore Airlines Cargo andChina Cargo Airlines , as well as theUnited States Army ,Navy ,Air Force and Federal Air Marshal Service. In addition, our management team has a diversity of experience from other industries at companies such as Mastercard, PepsiCo, Moody's,Ralph Lauren ,Kate Spade , Avon Products, New York Life Insurance,Hess and Unisys, as well as nationally recognized accounting and law firms. Our management team is led byJohn W. Dietrich , who has more than 30 years of experience in all facets of aviation and airline management.
Business Strategy
Our strategy includes the following:
Secure long-term customer contracts
We will continue to focus on securing long-term contracts with fast-growing customers, including those in express, e-commerce and the fastest-growing regional markets, which provide us with relatively stable revenue streams and margins. In addition, these agreements limit our direct exposure to fuel and other costs and mitigate the risk of fluctuations in both Yield and demand in the airfreight business, while also improving the overall utilization of our fleet.
Aggressively manage our fleet with a focus on leading-edge aircraft
We continue to actively manage our fleet of leading-edge wide-body freighter aircraft to meet customer demands. Our 747-8F and 777-200LRF freighter aircraft are primarily utilized in our ACMI business, while our 747-400s are utilized in our ACMI and Charter business. We aggressively manage our fleet to ensure that we provide our customers with the most efficient aircraft to meet their needs. OurDry Leasing business is primarily focused on a portfolio of modern, efficient 777-200LRF aircraft and our fleet of 767-300 freighter aircraft for regional and domestic applications. We will continue to explore opportunities to invest in additional aircraft. 32 --------------------------------------------------------------------------------
Drive significant and ongoing productivity improvements
We continue to enhance our organization through a cost saving and productivity enhancing initiative called "Continuous Improvement." We created a separate department to drive the process and to involve all areas of the organization in the effort to re-examine, redesign and improve the way we do business.
Selectively pursue and evaluate future acquisitions and alliances
From time to time, we explore business combinations, joint ventures and alliances with express delivery providers, e-commerce retailers, airlines, freight forwarders and other companies to enhance our competitive position, geographic reach and service portfolio.
Appropriately manage capital allocation and deliver value to shareholders
Our commitment to creating, enhancing and delivering value to our shareholders reflects a disciplined and balanced capital allocation strategy. Our focus is on growing our business while generating returns above our cost of capital, maintaining a strong balance sheet and returning capital to shareholders.
Merger Agreement
OnAugust 4, 2022 , we entered into a Merger Agreement with Parent and MergerCo, pursuant to which, subject to the terms and conditions thereof, MergerCo will be merged with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Parent. OnNovember 29, 2022 , the shareholders of AAWW common stock adopted the Merger Agreement. We are working to complete the transaction in the first quarter of 2023, and continue to make progress toward obtaining necessary approvals. At this time, we are awaiting final approval from the DOT and have received all other required shareholder and regulatory approvals. Upon completion of the Merger, AAWW will become a privately held company and shares of AAWW common stock will no longer be listed or publicly traded on The NASDAQ Global Select Market (see Note 2 to our Financial Statements for further discussion). The Company has incurred and will incur certain costs relating to the proposed Merger, such as financial advisory, legal, accounting and other professional services fees. Business Developments Our Airline Operations results for 2022, compared with 2021, reflected higher Yields, net of fuel. These were more than offset by increased pilot costs related to our new CBA, higher overtime pay driven by an increase in COVID-19 cases and higher premium pay for pilots operating in certain areas significantly impacted by the COVID-19 pandemic. In addition, our results were negatively impacted by lower aircraft utilization and higher crew travel costs driven by operational disruptions related to an abnormal increase in COVID-19 cases (which were significantly higher from late June through August) and severe weather events, as well as higher commercial passenger airfare rates. The higher Yields, net of fuel, include the impact of expanding and enhancing our relationships with strategic customers through new and extended long-term contracts driven by strong customer demand and increased cargo flying for the AMC. The increase in COVID-19 cases and severe weather events negatively impacted our crew availability and our ability to position them due to widespread and well-publicized cancellations of commercial passenger flights. We closely monitor the evolving COVID-19 pandemic and take numerous precautions to ensure the safety of our operations around the world and to help mitigate the impact of any disruptions, including continuously adjusting routes to limit exposure to regions significantly impacted. Given the dynamic nature of the COVID-19 pandemic, the financial impact cannot be reasonably estimated at this time. We have incurred and could incur further significant additional costs, including higher premium pay for pilots operating in certain areas significantly impacted by the COVID-19 pandemic and other operational costs, including costs for continuing to provide a safe working environment for our employees. In addition,COVID-19-related airport closures, employees who are unable to work, vaccine mandates, disruption of operations by our third-party service providers, availability of hotels and restaurants, ground handling delays or reductions in passenger flights by other airlines globally, have impacted and could have a further impact on overtime costs, crew travel costs and our ability to position employees to operate and fully utilize all of our aircraft. The continuation or worsening of the aforementioned and other factors could materially affect our results for the duration of the COVID-19 pandemic. We manage our fleet to profitably serve our customers with modern, efficient aircraft and have entered into the following transactions to secure capacity to meet strong customer demand. 33 --------------------------------------------------------------------------------
•
InJanuary 2021 , we signed an agreement with Boeing for the purchase of four new 747-8F aircraft. The first three of these aircraft were delivered in May, October and November of 2022 and the last aircraft was delivered in January of 2023. All four of these aircraft have been placed with customers under long-term contracts.
•
Between May andOctober 2021 , we acquired six of our existing 747-400 freighter aircraft that were previously on lease to us. In May and June of 2021, we reached agreement with several of our lessors to purchase five of our other 747-400 freighters at the end of their existing lease terms, all of which were acquired between March andDecember 2022 . InNovember 2022 , we reached agreement with one of our lessors to purchase a 747-400 freighter at the end of its existing lease term. The acquisition of the aircraft will be completed byApril 2023 .
•
InDecember 2021 , we signed an agreement with Boeing for the purchase of four new 777-200LRF aircraft. The first of these aircraft was delivered in November of 2022 and the remaining three are expected to be delivered throughout 2023. All four of these aircraft have been placed with a customer under a long-term agreement. We continually assess our aircraft requirements and will make adjustments to our capacity as necessary. Some of these actions may involve grounding or disposing of aircraft or engines, which could result in asset impairments or other charges in future periods. InMarch 2022 , we signed a five-year CBA with our pilots, effective as ofSeptember 2021 . Under this industry competitive agreement, all of our pilots are receiving significantly higher pay, quality of life improvements and enhanced benefits. Labor costs arising from this CBA are materially greater than the costs under our previous CBAs with our pilots (see Note 15 to our Financial Statements for further discussion).
Results of Operations
The following discussion should be read in conjunction with our Financial Statements and other financial information appearing and referred to elsewhere in this report.
Years ended
Operating Statistics
The following tables compare our Segment Operating Fleet (average aircraft
equivalents during the period) and total
Segment Operating Fleet 2022 2021 Inc/(Dec) Airline Operations* 747-8F Cargo 10.9 10.0 0.9 747-400 Cargo 34.7 34.5 0.2 747-400 Dreamlifter 0.5 0.8 (0.3 ) 747-400 Passenger 4.7 4.8 (0.1 ) 777-200 Cargo 9.1 9.0 0.1 767-300 Cargo 24.0 24.0 - 767-300 Passenger 5.6 4.9 0.7 767-200 Cargo - 2.0 (2.0 ) 767-200 Passenger - 0.1 (0.1 ) 737-800 Cargo 8.0 8.0 - Total 97.5 98.1 (0.6 ) Dry Leasing 777-200 Cargo 7.0 7.0 - 767-300 Cargo 21.0 21.0 - 737-300 Cargo - 1.0 (1.0 ) Total 28.0 29.0 (1.0 )
Less: Aircraft Dry Leased to CMI customers (21.0 ) (21.0 )
-
Total Operating Average Aircraft Equivalents 104.5 106.1
(1.6 )
* Airline Operations average fleet excludes spare aircraft provided by CMI customers.
Block Hours 2022 2021 Inc/(Dec) % Change
Total
** Includes Airline Operations and other
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--------------------------------------------------------------------------------Operating Revenue
The following table compares our Operating Revenue (in thousands):
2022 2021 Inc/(Dec) % Change
Operating Revenue
Airline Operations $ 4,395,905 $ 3,888,601 $ 507,304 13.0 %
Dry Leasing 170,908 163,365 7,543 4.6 %Customer incentive asset amortization (39,764 ) (44,162 )
(4,398 ) (10.0 )% Other 22,055 23,025 (970 ) (4.2 )% Total Operating Revenue$ 4,549,104 $ 4,030,829 Airline Operations 2022 2021 Inc/(Dec) % Change Block Hours Cargo 315,983 343,957 (27,974 ) (8.1 )% Passenger 12,067 15,905 (3,838 ) (24.1 )% Total Airline Operations 328,050 359,862 (31,812 ) (8.8 )% Revenue Per Block Hour Airline Operations$ 13,400 $ 10,806 $ 2,594 24.0 % Cargo$ 13,053 $ 10,413 $ 2,640 25.4 % Passenger$ 22,480 $ 19,290 $ 3,190 16.5 % Airline Operations revenue increased$507.3 million , or 13.0%, primarily due to an increase in Revenue per Block Hour, partially offset by a reduction inBlock Hours . Revenue per Block Hour rose primarily due to higher fuel prices and Yields, net of fuel, including the impact of new and extended long-term contracts and increased cargo flying for the AMC. Block hours decreased primarily due to operational disruptions, including an abnormal increase in COVID-19 cases (which were significantly higher from late June through August) and severe weather events, as well as a reduction in less profitable smaller gauge CMI service flying and our operation of fewer passenger flights. The increase in COVID-19 cases and severe weather events also adversely impacted our crew availability and our ability to position them due to the widespread and well-publicized cancellations of commercial passenger flights.
Dry Leasing revenue increased$7.5 million , or 4.6%, primarily due to$5.0 million of revenue from maintenance payments related to the scheduled return of an aircraft during the first quarter of 2022, which was subsequently sold during that quarter. Operating Expenses
The following table compares our Operating Expenses (in thousands):
2022 2021 Inc/(Dec) % Change
Operating Expenses
Aircraft fuel $ 1,335,622 $ 824,928 $ 510,694 61.9 %
Salaries, wages and benefits 1,135,153 924,440 210,713 22.8 %
Maintenance, materials and repairs 425,959 472,537 (46,578 ) (9.9 )%
Depreciation and amortization 303,220 281,209 22,011 7.8 %
Travel 211,902 162,986 48,916 30.0 %
Navigation fees, landing fees and (13.5 )%
other rent 159,212 184,060 (24,848 )
Passenger and ground handling services 140,381 156,962 (16,581 ) (10.6 )%
Aircraft rent 52,268 67,745 (15,477 ) (22.8 )%
Loss (gain) on disposal of flight NM
equipment 3,098 (794 ) (3,892 )
Special charge 16,215 - 16,215 NM
Transaction-related expenses 9,746 1,001 8,745 NM
Other 233,934 244,461 (10,527 ) (4.3 )%
Total Operating Expenses $ 4,026,710 $ 3,319,535 NM represents year-over-year changes that are not meaningful.
35
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Aircraft fuel increased $510.7 million , or 61.9%, primarily due to an increase
in the average fuel cost per gallon, partially offset by lower consumption
related to decreased Charter flying. Our exposure to fluctuations in fuel price
is generally limited to the shorter-term commercial portion of our Charter
services, as fuel risk is largely mitigated by price adjustments, including
those based on indexed fuel prices for longer-term commercial charter contracts.
We do not incur fuel expense in providing ACMI and CMI services or in our Dry
Leasing business as the cost of fuel is borne by the customer. Similarly, we
generally have no fuel price risk for AMC charters because the price is
typically set under our contract with the AMC, and we receive or make payments
to adjust for price increases and decreases from the contractual rate. Average
fuel cost per gallon and fuel consumption for 2022 and 2021 were:
2022 2021 Inc/(Dec) % Change
Average fuel cost per gallon
71.0 % Fuel gallons consumed (000s) 390,808 411,845 (21,037 )
(5.1 )%
Salaries, wages and benefits increased$210.7 million , or 22.8%, primarily due to increased pilot costs related to our new CBA and higher premium pay for pilots operating in certain areas significantly impacted by the COVID-19 pandemic, partially offset by decreased flying and a$29.2 million adjustment to paid time-off benefits that was expensed in 2021 related to our new CBA. Maintenance, materials and repairs decreased by$46.6 million , or 9.9%, primarily reflecting$25.2 million of lower Heavy Maintenance expense and$18.9 million of reduced Line Maintenance expense. Heavy Maintenance expense on 747-400 aircraft decreased$13.0 million primarily due to a decrease in the number of engine overhauls. Heavy Maintenance expense on 747-8F aircraft decreased$7.4 million primarily due to a decrease in the number of D Checks. Line Maintenance expense decreased primarily due to the reduction in flying. Heavy airframe maintenance checks and engine overhauls impacting Maintenance, materials and repairs for 2022 and 2021 were: Heavy Maintenance Events 2022 2021 Inc/(Dec) 747-8F C Checks 4 4 - 747-400 C Checks 13 12 1 777-200 C Checks 1 - 1 767 C Checks 5 6 (1 ) 747-8F D Checks - 2 (2 ) 747-400 D Checks 5 5 - CF6-80 engine overhauls 8 7 1 PW4000 engine overhauls 1 4 (3 ) Depreciation and amortization increased$22.0 million , or 7.8%, primarily due to an increase in depreciation related to the acquisition of 747-400 freighter aircraft throughout 2022 and 2021 that were previously on lease to us, changes in 747-400 freighter aircraft leases in 2021 and the acquisition of new 747-8F and 777-200LRF aircraft. Travel increased$48.9 million , or 30.0%, primarily due to increased commercial passenger airfare rates and operational disruptions related to an increase in COVID-19 cases (which were significantly higher from late June through August) and severe weather events, partially offset by decreased flying.
Navigation fees, landing fees and other rent decreased
Passenger and ground handling services decreased
Aircraft rent decreased$15.5 million , or 22.8%, primarily due to the acquisition of 747-400 freighter aircraft throughout 2022 and 2021 that were previously on lease to us and changes in 747-400 freighter aircraft leases in 2021. Loss (gain) on disposal of flight equipment in 2022 represented a loss on the sale of four nonoperational spare CF6-80 engines, partially offset by a gain from the sale of six nonoperational spare CF6-80 engines, which were previously classified as assets held for sale. Loss (gain) on disposal of flight equipment in 2021 represented a net gain from the sale of certain nonessential assets (see Note 7 to our Financial Statements). Special charge in 2022 relates to six nonoperational spare CF6-80 engines held for sale to be traded in for newly overhauled engines and relates to two other CF6-80 engines Dry Leased to a customer (see Note 7 to our Financial Statements).
Transaction-related expenses in 2022 represents costs associated with the proposed Merger transaction (see Note 2 to our Financial Statements).
36
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Other decreased
Non-operating Expenses (Income)
The following table compares our Non-operating Expenses (Income) (in thousands):
2022 2021 Inc/(Dec) % Change
Non-operating (Income) Expenses
Interest income $ (8,755 ) $ (723 ) $ 8,032 NM
Interest expense 81,692 107,492 (25,800 ) (24.0 )%
Capitalized interest (12,683 ) (8,316 ) 4,367 52.5 %
Loss on early extinguishment of debt 689 6,042 (5,353 ) NM
Unrealized loss on financial instruments - 113 (113 ) NM
Other (income) expense, net (185 ) (40,705 ) (40,520 ) (99.5 )%
Interest income increased
Interest expense decreased$25.8 million , or 24.0%, primarily due to the adoption of the amended accounting guidance for convertible notes onJanuary 1, 2022 (see Note 3 to our Financial Statements) and the scheduled repayment of debt. Capitalized interest increased$4.4 million primarily due to pre-delivery deposits related to ourJanuary 2021 agreement to purchase four 747-8F aircraft and ourDecember 2021 agreement to purchase four 777-200LRF aircraft from Boeing (see Note 3 to our Financial Statements).
Other (income) expense, net decreased
Income taxes. Our effective income tax rates were 22.9% and 23.8% for 2022 and 2021, respectively. The effective income tax rates for 2022 and 2021 differed from theU.S. statutory rate primarily due to state income taxes and certain expenses that are not deductible for tax purposes.
Segments
The following table compares the Direct Contribution for our reportable segments
(see Note 14 to our Financial Statements for the reconciliation to Operating
income) (in thousands):
2022 2021 Inc/(Dec) % Change
Direct Contribution
Airline Operations $ 815,647 $ 1,020,887 $ (205,240 ) (20.1 )%
Dry Leasing 56,142 42,587 13,555 31.8 %
Total Direct Contribution $ 871,789 $ 1,063,474 $ (191,685 ) (18.0 )%
Unallocated expenses and (income), net
Airline Operations Segment Airline Operations Direct Contribution decreased$205.2 million , or 20.1%, primarily due to increased pilot costs related to our new CBA, higher overtime pay driven by operational disruptions, including an abnormal increase in COVID-19 cases (which were significantly higher from late June through August) and severe weather events, and higher premium pay for pilots operating in certain areas significantly impacted by COVID-19. In addition, Direct Contribution was negatively impacted by lower aircraft utilization and higher crew travel costs driven by the operational disruptions noted above, as well as higher commercial passenger airfare rates. The increase in COVID-19 cases and severe weather events also adversely impacted our crew availability and our ability to position them due to the widespread and well-publicized cancellations of commercial passenger flights. Partially offsetting the impact of these items were increased Yields, net of fuel, primarily driven by new and extended long-term contracts, increased cargo flying for the AMC, and lower Heavy Maintenance expense. 37 --------------------------------------------------------------------------------
Dry Leasing Segment
Dry Leasing Direct Contribution increased$13.6 million , or 31.8%, primarily driven by lower interest expense related to the scheduled repayment of debt and$5.0 million of revenue from maintenance payments related to the scheduled return of an aircraft.
Unallocated expenses and (income), net
Unallocated expenses and (income), net decreased$29.3 million , or 7.2%, primarily due to a$29.2 million adjustment to paid time-off benefits that was expensed in 2021 related to our new CBA, lower interest expense due to the adoption of the amended accounting guidance for convertible notes onJanuary 1, 2022 (see Note 3 to our Financial Statements) and a decrease in professional fees. Partially offsetting these items was$40.9 million in CARES Act grant income recognized in 2021 (see Note 4 to our Financial Statements).
Reconciliation of GAAP to non-GAAP Financial Measures
To supplement our Financial Statements presented in accordance with GAAP, we
present certain non-GAAP financial measures to assist in the evaluation of our
business performance. These non-GAAP financial measures include Adjusted income
from continuing operations, net of taxes, Adjusted Diluted EPS from continuing
operations, net of taxes and Adjusted earnings before interest, taxes,
depreciation and amortization ("Adjusted EBITDA"), which exclude certain noncash
income and expenses, and items impacting year-over-year comparisons of our
results. These non-GAAP financial measures may not be comparable to similarly
titled measures used by other companies and should not be considered in
isolation or as a substitute for Income from continuing operations, net of taxes
and Diluted EPS from continuing operations, net of taxes which are the most
directly comparable measures of performance prepared in accordance with GAAP.
We use these non-GAAP financial measures in assessing the performance of our
ongoing operations and in planning and forecasting future periods. These
adjusted measures provide a more comparable basis to analyze operating results
and earnings and are measures commonly used by shareholders to measure our
performance. In addition, management's incentive compensation is determined, in
part, by using Adjusted income from continuing operations, net of taxes and
Adjusted EBITDA. We believe that these adjusted measures, when considered
together with the corresponding GAAP financial measures and the reconciliations
to those measures, provide meaningful supplemental information to assist
investors and analysts in understanding our business results and assessing our
prospects for future performance.
The following is a reconciliation of Income (loss) from continuing operations,
net of taxes and Diluted EPS from continuing operations, net of taxes to the
corresponding non-GAAP financial measures (in thousands, except per share data):
For the Years Ended December 31,
2022 2021 Percent Change
Net Income $ 355,880 $ 493,317 (27.9 )%
Impact from:
CARES Act grant income (a) - (40,944 )
Customer incentive asset amortization 39,764 44,162
Adjustments to CBA paid time-off benefits (b) 2,154
29,211
Special charge (c) 16,215 - Costs associated with transactions (d) 12,192
1,013
Noncash expenses and income, net (e) - 19,136 Unrealized loss on financial instruments - 113 Other, net (f) 3,787 6,739 Income tax effect of reconciling items (11,983 ) (5,795 ) Special tax item (g) - 4,041 Adjusted Net Income$ 418,009 $ 550,993 (24.1 )% Weighted average diluted shares outstanding 34,190
30,543
Less: effect of convertible notes hedges (h) (4,806 ) (782 ) Adjusted weighted average diluted shares outstanding 29,384 29,761 Adjusted Diluted EPS$ 14.23 $ 18.51 (23.1 )% 38
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For the Years Ended December 31,
2021 2020 Percent Change
Net Income $ 493,317 $ 360,286 (36.9 )%
Impact from:
CARES Act grant income (a) (40,944 ) (151,590 )
Customer incentive asset amortization 44,162 39,090
Adjustments to CBA paid time-off benefits (b) 29,211 - Special charge (c) -
16,265
Costs associated with transactions (d) 1,013 - Noncash expenses and income, net (e) 19,136 17,971 Unrealized loss on financial instruments 113 71,053 Other, net (f) 6,739 2,382 Income tax effect of reconciling items (5,795 ) 23,580 Special tax item (g) 4,041 - Adjusted Net Income$ 550,993 $ 379,037 45.4 % Weighted average diluted shares outstanding 30,543
26,690
Add: dilutive warrant (i) -
1,040
Less: effect of convertible notes hedges (h) (782 ) - Adjusted weighted average diluted shares outstanding 29,761 27,730 Adjusted Diluted EPS$ 18.51 $ 13.67 35.4 %
The following is a reconciliation of Income (loss) from continuing operations, net of taxes to Adjusted EBITDA (in thousands):
For the Years Ended December 31,
2022 2021 Percent Change
Net Income $ 355,880 $ 493,317 (27.9 )%
Interest expense, net 60,254 98,453
Depreciation and amortization 303,220 281,209
Income tax expense 105,756 154,074
EBITDA 825,110 1,027,053
CARES Act grant income (a) - (40,944 )
Customer incentive asset amortization 39,764 44,162
Adjustments to CBA paid time-off 2,154 29,211
benefits (b)
Special charge (c) 16,215 -
Costs associated with transactions (d) 12,192 1,013
Unrealized loss on financial - 113
instruments
Other, net (f) 3,787 6,739
Adjusted EBITDA $ 899,222 $ 1,067,347 (15.8 )%
For the Years Ended December 31,
2021 2020 Percent Change
Net Income $ 493,317 $ 360,286 36.9 %
Interest expense, net 98,453 112,634
Depreciation and amortization 281,209 257,672
Income tax (benefit) expense 154,074 136,456
EBITDA 1,027,053 867,048
CARES Act grant income (a) (40,944 ) (151,590 )
Customer incentive asset amortization 44,162 39,090
Special charge (c) - 16,265
Adjustments to CBA paid time-off 29,211 -
benefits (b)
Costs associated with transactions (d) 1,013 -
Unrealized loss on financial 113 71,053
instruments
Other, net (f) 6,739 2,382
Adjusted EBITDA $ 1,067,347 $ 844,248 26.4 %
(a)CARES Act grant income in 2021 and 2020 related to income associated with the Payroll Support Program (see Note 4 to our Financial Statements).
(b)
Adjustments to CBA paid time-off benefits in 2022 and 2021 are related to our new CBA (see Note 15 to our Financial Statements).
39
--------------------------------------------------------------------------------(c)
Special charge in 2022 represented a charge related to six nonoperational spare CF6-80 engines held for sale and two CF6-80 engines Dry Leased to a customer. Special charge in 2020 represented a charge related to fair value adjustments for assets held for sale.
(d)
Costs associated with transactions in 2022 are related to our proposed Merger (see Note 2 to our Financial Statements). Costs associated with transactions in 2021 and 2020 are related to our previous acquisition of an airline.
(e)
Noncash expenses and income, net in 2021 and 2020 primarily related to amortization of debt discount on the convertible notes (see Note 10 to our Financial Statements).
(f)
Other, net in 2022 primarily related to a loss on the sale of four nonoperational spare CF6-80 engines, partially offset by a gain from the sale of six nonoperational spare CF6-80 engines, which were previously classified as assets held for sale (see Note 7 to our Financial Statements) and a loss on early extinguishment of debt. Other, net in 2021 primarily related to leadership transaction costs. Other, net in 2020 primarily related to a$7.2 million net gain on the sale of aircraft, as well as costs associated with the Payroll Support Program (see Note 4 to our Financial Statements), costs associated with the refinancing of debt and accrual for legal matters and professional fees.
(g)
Special tax item in 2021 represented the income tax expense from the integration of a previously-acquired airline (see Note 15 to our Financial Statements). Special tax items are not related to ongoing operations.
(h)
Represents the economic benefit from our convertible notes hedges in offsetting dilution from our convertible notes as we concluded that generally there would be no economic dilution result from conversion of each of the convertible notes when our stock price is below the exercise price of the respective convertible note warrants (see Note 10 to our Financial Statements).
(i)
Dilutive warrants represent potentially dilutive common shares related to warrants issued to a customer (see Note 9 to our Financial Statements). These warrants are excluded from Diluted EPS prepared in accordance with GAAP when they would have been antidilutive.
Liquidity and Capital Resources
InFebruary 2022 , we paid$100.0 million and received an initial delivery of 1,061,257 shares pursuant to an accelerated share repurchase program ("ASR") under a stock repurchase program approved by our board of directors, which authorized the repurchase of up to$200.0 million of our common stock. We subsequently settled the ASR inApril 2022 and received an additional 172,887 shares of common stock. In the aggregate, we repurchased 1,234,144 shares (see Note 18 to our Financial Statements for a discussion of our ASR). In connection with the proposed Merger (see Note 2 to our Financial Statements), we have suspended the stock repurchase program.
In
In
In
In
In
Operating Activities. For 2022, Net cash provided by operating activities was$837.7 million , which primarily reflected Net income of$355.9 million , noncash adjustments of$354.1 million for Depreciation and amortization and$104.7 million for deferred taxes, and a$49.9 million decrease in Accounts receivable. Partially offsetting these items was an$18.2 million increase in Prepaid expenses, current assets, and other assets, and a$42.0 million decrease in Accounts payable and accrued liabilities. For 2021, Net cash provided by operating activities was$923.0 million , which primarily reflected Net income of$493.3 million , noncash adjustments of$357.3 million for Depreciation and amortization and$152.4 million for deferred taxes. Partially offsetting these items was a$49.8 million increase in Prepaid expenses, current assets, and other assets, a$37.8 million increase in Accounts receivable and a$11.5 million decrease in Accounts payable and accrued liabilities. 40 -------------------------------------------------------------------------------- Investing Activities. For 2022, Net cash used for investing activities was$820.3 million , consisting primarily of$743.1 million of payments for flight equipment and modifications, and$103.2 million of core capital expenditures, excluding flight equipment, partially offset by$36.6 million of proceeds from the disposal of aircraft. Payments for flight equipment and modifications during 2022 were primarily related to the delivery of three 747-8F aircraft and one 777-200LRF aircraft, pre-delivery payments for 777-200LRF aircraft and spare engines. All capital expenditures for 2022 were funded through working capital and the financings discussed above. For 2021, Net cash used for investing activities was$493.4 million , consisting primarily of$407.7 million of payments for flight equipment and modifications, and$90.3 million of core capital expenditures, excluding flight equipment, partially offset by$9.5 million of proceeds from the disposal of aircraft. Payments for flight equipment and modifications during 2021 were primarily related to pre-delivery payments, spare engines and GEnx engine performance upgrade kits. Financing Activities. For 2022, Net cash used for financing activities was$164.6 million , which primarily reflected$693.7 million of payments on debt and finance lease obligations and$100.0 million related to the purchase of treasury stock and$14.7 million in payments of debt issuance costs. Partially offsetting these items were proceeds from debt issuance of$652.9 million , and$16.7 million of customer maintenance reserves and deposits received. For 2021, Net cash used for financing activities was$364.9 million , which primarily reflected$542.6 million of payments on debt and finance lease obligations and$35.6 million in payments of maintenance reserves, partially offset by proceeds from debt issuance of$212.7 million , and$17.7 million of customer maintenance reserves and deposits received. We consider Cash and cash equivalents, Net cash provided by operating activities and availability under our revolving credit facility to be sufficient to meet our debt and lease obligations, to fund capital expenditures for 2023, as follows:
•
Principal payments related to our debt and finance lease obligations are
expected to be approximately
•
Payments related to our operating leases are expected to be approximately
•
Core capital expenditures are expected to range from
•
Committed capital expenditures for flight equipment are expected to be
approximately
Committed capital expenditures include the remaining delivery payments for the purchase of one new 747-8F and three new 777-200LRF aircraft from Boeing, and other agreements to acquire spare engines. We expect to finance the aircraft delivery payments for the remaining three 777-200LRF aircraft through secured debt financing, which are expected to be delivered throughout 2023. The last 747-8F aircraft was delivered in January of 2023 and we borrowed$156.5 million under a secured twelve-year term loan at a fixed interest rate of 3.89%. We may access external sources of capital from time to time depending on our cash requirements, assessments of current and anticipated market conditions, and the after-tax cost of capital. To that end, we filed a shelf registration statement with theSEC inApril 2020 that enables us to sell debt and/or equity securities on a registered basis over the subsequent three years, depending on market conditions, our capital needs and other factors. Our access to capital markets can be adversely impacted by prevailing economic conditions and by financial, business and other factors, some of which are beyond our control. Additionally, our borrowing costs are affected by market conditions and may be adversely impacted by a tightening in credit markets. We do not expect to pay any significantU.S. federal income tax for at least several years. Our business operations are subject to income tax in several foreign jurisdictions and in many states. We do not expect to pay any significant cash income taxes for at least several years in these foreign jurisdictions and states. We may repatriate the unremitted earnings of our foreign subsidiaries to the extent taxes are insignificant. TheU.S. and numerous other countries are currently considering tax reform, which could result in significant changes toU.S. and international tax laws. The potential enactment of these laws could have a material impact on our business, results of operations and financial condition. We continue to monitor developments and assess the impact to us.
Description of Our Debt Obligations
See Note 10 to our Financial Statements for a description of our debt obligations.
41
--------------------------------------------------------------------------------Off-Balance Sheet Arrangements
See Note 11 to our Financial Statements for a discussion of aircraft-leasing trusts that meet the criteria for variable interest entities. We have not consolidated any of the aircraft-leasing trusts in which we are not the primary beneficiary. We hold equity interests in two joint venture arrangements to help develop a diversified freighter aircraftDry Leasing portfolio and to purchase rotable parts and repair services for those parts, primarily for our 747-8F aircraft. Neither of these joint ventures qualifies for consolidated accounting treatment. The assets and liabilities of these entities are not included in our Consolidated Balance Sheets and we record our net investment under the equity method of accounting. See Note 3 to our Financial Statements for further discussion.
Critical Accounting Policies and Estimates
General Discussion of Critical Accounting Policies and Estimates
An appreciation of our critical accounting policies and estimates is important to understand our financial results. Our Financial Statements are prepared in conformity with GAAP. Our critical policies require management to make estimates and judgments that affect the amounts reported. Actual results may differ significantly from those estimates. The following is a brief description of our current critical accounting policies and estimates involving significant management judgment:
Accounting for Long-Lived Assets
We record our property and equipment at cost, and once assets are placed in service, we depreciate them on a straight-line basis over their estimated useful lives to their estimated residual values over periods not to exceed forty years for flight equipment (from date of original manufacture) and three to five years for ground equipment. We record right-of-use assets for operating leases with terms greater than 12 months, including renewal options when appropriate, as the present value of fixed lease payments over the lease term. Since our leases do not typically provide a readily determinable discount rate, we use our incremental borrowing rate to discount lease payments to present value. Operating lease right-of-use assets are amortized over each lease term. We record finite-lived intangible assets acquired at fair value and amortize them over their estimated useful lives. The estimated useful lives are based on estimates of the period during which the assets are expected to generate revenue. We record impairment charges for long-lived assets when events and circumstances indicate that the assets may be impaired, the undiscounted cash flows estimated to be generated by those assets are less than their carrying amount and the net book value of the assets exceeds their estimated fair value. In making these determinations, we use certain assumptions and estimates, including, but not limited to: (i) estimated fair value of the assets, and (ii) estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, revenue generated, associated costs, length of service and estimated residual values. In developing these estimates for flight equipment and operating lease right-of-use assets, we use external appraisals, adjusted for maintenance condition, as necessary; bids received from independent third parties; and industry data. To estimate the fair value of operating lease right-of-use assets, we determine the present value of current market fixed lease rates utilizing our incremental borrowing rate for the remaining term of each lease. To conduct impairment testing, we group assets and liabilities at the lowest level for which identifiable cash flows are largely independent of cash flows of other assets and liabilities. For flight equipment, operating lease right-of-use assets and finite-lived intangible assets used in our Airline Operations segment, assets are grouped at the operating fleet level. For flight equipment and finite-lived intangible assets used in ourDry Leasing segment, assets are assessed at the individual aircraft or engine level. Our long-lived asset groups evaluated for impairment can include flight equipment such as the aircraft, engines, rotable parts, leasehold improvements, operating lease right-of-use assets, as well as associated finite-lived intangible assets and deferred maintenance costs. If actual results differ from the assumptions or estimates used in our analysis or if there are downturns in economic or business conditions, it could have a material adverse impact on cash flows used to determine the fair value of our long-lived asset groups in relation to their carrying values and could result in an impairment loss. For assets classified as held for sale, an impairment charge is recognized when the estimated fair value less the cost to sell the asset is less than its carrying amount. Fair value is determined using external appraisals or bids received from independent third parties. To the extent that these estimates are different than the actual selling prices of these assets, we could recognize subsequent impairment losses or gains on the disposition of these assets. 42 --------------------------------------------------------------------------------
Heavy Maintenance
Except as described in the paragraph below, we account for heavy maintenance costs for airframes and engines using the direct expense method. Under this method, heavy maintenance costs are charged to expense upon induction, based on our best estimate of the costs. When estimating the expected cost for each Heavy Maintenance event, management considers multiple factors, including historical costs and experience, and information provided by third-party maintenance providers. These estimates may be subsequently adjusted for changes and the final determination of actual costs incurred. This method can result in expense volatility between quarterly and annual periods, depending on the number and type of Heavy Maintenance events performed. As ofDecember 31, 2022 and 2021, Accrued heavy maintenance was$31.6 million and$79.6 million , respectively. If our estimates of Accrued heavy maintenance as ofDecember 31, 2022 would have changed by a hypothetical 10%, we would have recognized a change in Maintenance, materials and repairs expense of$3.2 million in 2022. We account for Heavy Maintenance costs for airframes and engines used in ourDry Leasing segment and engines used on our 747-8F and 777-200 aircraft using the deferral method. Under this method, we defer the expense recognition of scheduled Heavy Maintenance events, which are amortized over the shorter of the estimated period until the next scheduled Heavy Maintenance event is required or remaining lease term. Income Taxes Deferred income taxes are recognized for the tax consequences of reporting items in our income tax returns at different times than the items are reflected in our financial statements. These temporary differences result in deferred tax assets and liabilities that are calculated by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. If necessary, deferred income tax assets are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable. We must make significant estimates and assumptions about future taxable income and future tax consequences when determining the amount, if any, of the valuation allowance. We have recorded reserves for income taxes that may become payable in future years. Although management believes that its positions taken on income tax matters are reasonable, actual results could differ or taxing authorities could challenge certain of the positions taken by us, which could result in losses or gains that could be material. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement in excess of any reserves established would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement less than any reserves established would result in a reduction in our effective income tax rate in the period of resolution.
Goodwill represents the excess of an acquisition's purchase price over the fair value of the identifiable net assets acquired and liabilities assumed.Goodwill is not amortized, but tested for impairment annually during the fourth quarter of each year, or more frequently if certain events or circumstances indicate that an impairment loss may have been incurred. We may elect to perform a qualitative analysis on the reporting unit that has goodwill to determine whether it is more likely than not that fair value of the reporting unit is less than its carrying value. Under the qualitative approach, we consider various market factors to determine whether events and circumstances have affected the fair value of the reporting unit. If we determine that it is more likely than not that the reporting unit's fair value is less than its carrying amount, or if we elect not to perform a qualitative analysis, we perform a quantitative analysis to determine whether any goodwill impairment exists.
Fair value is determined using a discounted cash flow analysis based on key assumptions including, but not limited to, (i) a projection of revenues, expenses and other cash flows; (ii) terminal period earnings; and (iii) an assumed discount rate. If the fair value of the reporting unit is less than the carrying amount, the difference is written off as an impairment up to the carrying amount of goodwill.
During the fourth quarter of 2022, we performed a qualitative assessment and
determined that it was not necessary to perform a quantitative analysis. If
actual results differ from the assumptions used in our qualitative analysis or
there are changes in these qualitative factors, such as downturns in economic or
business conditions, it could have a material adverse impact on the fair value
of the reporting unit in relation to the carrying value of goodwill and could
result in an impairment loss.
Legal and Regulatory Matters
We are party to legal and regulatory proceedings with respect to a variety of
matters in multiple jurisdictions. We evaluate the likelihood of an unfavorable
outcome of these proceedings each quarter. The events that may impact our
contingent liabilities are often unique and generally are not predictable. At
the time a contingency is identified, we consider all relevant facts as part of
our evaluation. We record a liability for a loss when the likelihood of the loss
occurring is probable and the amount of the loss is
43
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reasonably estimable. Events may arise that were not anticipated and the outcome
of a contingency may result in a loss to us that differs from our previously
estimated liability. Our judgments are subjective and are based on the status of
the legal or regulatory proceedings, the merits of our defenses and consultation
with legal counsel.
Recent Accounting Pronouncements
See Note 3 to our Financial Statements for a discussion of recent accounting pronouncements.
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